Op-Ed on Deposit Insurance Reforms
An Op-Ed in The Wall Street Journal earlier this month, entitled, "The Private Market Can Add Discipline to Deposit Insurance," comments, "Following the collapse of Silicon Valley Bank, Signature Bank and First Republic Bank this spring, U.S. lawmakers have faced a policy head-scratcher. When bank runs happen on the internet, not at the teller's window, how can the government ensure that smaller and regional banks can meet increased demands for liquidity during moments of panic? Excessive capital requirements would harm smaller banks more than larger ones, while reducing the demand for liquidity by increasing the amount of deposit insurance would create serious moral hazard. Solving such a complex problem requires a fresh look at deposit insurance. The Federal Deposit Insurance Corp., to its credit, hinted at the answer in a May report on the history and nature of deposit insurance. It asked whether private insurance has a role to play. The answer is an emphatic yes -- even if the FDIC doesn't, so far, seem to agree." The piece tells us, "Congress should revisit the idea of a public-private deposit-insurance program and add a new twist that draws on historical experience. To encourage the growth of the nuclear-energy industry, Congress passed the Price-Anderson Act in 1957, which established a federal insurance backstop for nuclear accidents. Following 9/11, Congress passed the Terrorism Risk Insurance Act to ensure customers could obtain terrorism coverage from property and casualty insurers.... Congress should learn from these laws and propose new public-private deposit-insurance legislation. The bill could require banks to provide private-sector deposit insurance up to a certain threshold per depositor -- say $5 million -- and mandate that at least 90% of total deposits of each bank be covered by a combination of FDIC and private insurance policies. There is already a model that legislators, regulators and banks could follow: Credit unions have offered excess deposit insurance through private-sector insurance companies for over two decades." It adds, "An added wrinkle: If a bank isn't able to obtain private market insurance for 90% of its deposits during a given year, legislation could require the bank to pay a substantial premium over the private-market insurance rate of peer institutions for additional FDIC coverage. This pricing discipline would give the FDIC confidence that it's reducing the risk of bank runs without encouraging bankers to act imprudently."
